MK on China and Gold

From the USAGold forum...

MK (usagold.com 25April2009; 12:50)
China and gold: In the footsteps of giants

There may be something of a misunderstanding with respect to the increase in Chinese reserves. The bulk of that gold has come from purchases of their own domestic production, not open market purchases. The impact on the price is therefore indirect. However, because China is the largest gold producer in the world, and it is retaining the bulk of its production for reserve diversification purposes, that impact is significant.

Consider, for example, if South Africa had been able to retain the bulk of its production during the years it was the prime producer. It would today be one of the richest countries in the world. As Pierre Lassonde reminded us in the recent past, there haven’t been any large scale in-ground discoveries in many years. That puts China in a very strong position with respect to the gold market, and from what we can gather, it has decided to play that card. Because of its strong exports, it doesn’t need to export gold like South Africa did to sustain and strengthen its economy. China will be able to build gold reserves and make the yuan stronger — its financial muscle the weight of its gold holdings which are likely to grow year to year, and perhaps even accelerate as new fields are brought into production. In addition, as the price of gold rises, so too will the value of its gold reserve. The currency advantage is the one thing the press reports yesterday and this morning overlooked, and as time passes, that may be the most important.

Now, I realize that all of this is not quite so glamorous as China buying up every loose official sector ounce, but, at the same time, what I have described above will have a greater long term impact than any purchase of a one-off official sector sale. China, true to its reputation for patience and steady, long-term progress toward its goals, has taken the golden path and now they want the world to know about it.

Last April in my Golden Gut Check essay I mentioned the importance of China keeping its gold production home. At the time, the market overlooked it as a major factor in future pricing considerations. Now, with publication of a reserve gain which occurred over a five year period, hard numbers are available. China seems to want to make a point and the general market seems to have recognized its importance. (The China gold story made the front page of today’s Financial Times weekend edition.)

Taking this discussion a step further (and this might be worth another essay by itself) at some point, the Chinese might be very interested in a revaluation that compensates it for its dollar stockpile, and others might be willing to go along as the least offensive means to bringing balance to the international economic equation. That revaluation could occur informally with the market moving steadily higher over the years in a free-market dynamic, or it could occur formally as a return to the gold standard. I do not need to explain to this forum’s readers and participants what that would mean to gold owners the world over.

While we ponder the meaning of Chinese gold reserve growth, let’s not set aside the other major gold story from China during the past week. It’s request to the IMF that it sell the entirety of its 3217 tonne reserve coincides with its announcement on reserves and is intended to deliver a message to the financial markets: It sees gold as an important part of the overall international monetary scheme — a scheme that may evolve to a system in time. If China were to purchase the full 3217 tonnes at $1000 per ounce, the price would be $103 billion. With current foreign reserves (of all description) at $1.95 trillion, the purchase price of all the IMF gold would amount to a paltry 5.25% of China’s total reserves. China has made the IMF gold sale bludgeon look more like a wet noodle.

From China’s perspective here’s how it looks:

$1,950 billion total reserves
$ -103 billion cost of 3217 tonnes of IMF gold
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$1,847 billion total reserves remaining

(And by the way China would then become the largest holder of gold in the world after the United States and the European Union.)

The message contained in China’s actions of the past week is unmistakable. China knows that gold is making a comeback almost as a force of nature. Its return to the center of value will be dictated by history and events with or without the help of the world’s governments. I believe China is preparing for that day, and from its perspective apparently it cannot prepare fast enough. The first step toward stability for both individuals and nation states is a step in the direction of gold and China has taken it.

Talk about following in the footsteps of giants (with a nod to my old friend, Another). . . . .

__________________

FOOTSTEPS OF GIANTS POST
Sat Jan 10 1998 21:03
ANOTHER (THOUGHTS!) ID#60253:

Someone once said, “noone wants gold, that’s why the US$ price keeps falling”. Many thinking ones laugh at such foolish chatter. They know that the price of gold is dropping precisely because “too many people are buying it”! Think now, if you are a person of “great worth” is it not better for you to acquire gold over years, at better prices? If you are one of “small worth”, can you not follow in the footsteps of giants? I tell you, it is an easy path to follow! An experienced guide is not needed for this trail, look around you and see. The real money is selling ALL FORMS of paper gold and buying physical! Why? Because any form of paper gold is loosing value much, much faster than metal. Some paper will disappear all together in a fire of epic proportions! The massive trading continues at LBMA, but something is now missing? The CBs are no longer lending! They will not anymore! We have reached production costs. Oil will have nothing of “gold paper” if gold must stay in the ground! And a CB values the wishes of oil far above it’s return of leased gold! Hear me now, “if gold tries to go lower than US$ $280 the BIS will buy it OUTRIGHT in the OPEN for all to see”! They must! They will! I know. For no currency system could stand if “Oil” were to bid for gold!

Oil has kept “the deal” as the CBs sold paper to lower golds price! All is fair. Asia will bid for gold not as in the past. They now know that the free flow of oil has more value than the Pacific economy. But the price that was paid may be more than the world currency system can endure.

To close:

The US$ has risen on a flight of fear. That will now end as the LBMA shorts are given to wolves. If this fire burns too hot, gold will turn and it’s trading halted. The price of oil will explode as gold becomes the “world oil currency”! Even now oil has locked the IMFs gold, Asia will bid against them no more. We come to extreame times.

Risk not your wealth in paper, we enter a period of truth.

The complete writings of ANOTHER - (USAGOLD)

Onward my friends and -

Semper aurum,

Michael J. Kosares
The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold
Owner, USAGOLD-Centennial Precious Metals, Inc.

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